Questions and Answers by Fadi Baradihi

Sadly, some of the biggest financial blunders are the most common, according
to Fadi Baradihi, president and chief executive officer of the Institute for Certified
Divorce Planners in Southfield, Mich.

Q: I'd wager relatively few divorcing couples
have even heard of a certified divorce planner, let alone consulted one. What's the
designation mean, and how are your services different from your garden-variety certified
financial planner?

Mr. Baradihi: Most often, I'll make my first contact
with a client through the divorce attorney, who calls me and says `I have a client I'd
like you to get together with.' Attorneys are skilled in family law, but most aren't
financial experts and many often need assistance in determining what kind of settlement is
fair.

The financial issues inherent to every divorce case are
often times the ones that are the most overlooked. However, once a divorce
settlement has been signed, it's too late to change it. For most of my clients, this
is the first time they've ever been asked to map out their financial lives, and it can be
an emotional experience. It's not uncommon for a therapist to join the consultation
with myself and an attorney.

A CDP can answer questions such as: Who should keep the
house? How much will it cost to live post divorce? How much alimony should be
granted and for how long? How can the retirement accounts be split and
accessed? How can a business be offset? And most important of all, will the
clients be able to survive financially with the settlement post divorce?

Different than other "generalist"
financial-planning designations, any one of the 800 CDP designees who have been through
our training, use the same approach to helping and working with clients, and use our
proprietary divorce-planning software to project the long-term ramifications of a divorce
settlement on their client's future financial health. Depending on the region, CDPs
charge anywhere from $100 to $200 an hour, and you can expect on average 10 to 15 hours
will be spent per divorce case -- though that figure can be much higher for more complex
marital settlements.

Q: Ok, let's cut to the chase. The two
biggest blunders you've seen divorcing couples make both involve residential real
estate. What are they?

Mr. Baradihi: Most often, the husband wants the
retirement plan and the wife wants the house. The wife usually wants the house for
the sake of continuity. For example, when there are children involved, a wife will
often argue for custody of the children and the house, so that the children's lives will
not be further disrupted by a move. But what many spouses fail to consider is
whether they will be able to still afford to live in that house after the marriage is
dissolved. Say you have a wife, who perhaps interrupted her education or career to
have children. After the divorce, this woman may have to return to school, or start
at a lower rung on the corporate ladder than she would be at had she continued
working. Because real-estate is very often the biggest portion of a couple's net
worth, the spouse with the lesser-paying job will often argue the hardest to keep it --
but in reality it's an illiquid asset that carries a very hefty price tag to
maintain. In many instances, it makes the most sense to sell the home and split the
proceeds, though that adds in the coping with the emotions of giving up the house.
Logic aside, however, the choice to keep the home and give up other assets usually is
driven by emotion.

Q: Besides the upkeep on maintenance and taxes,
what other costs need to be taken into account when dealing with whether or not to keep
the home?

Mr. Baradihi: That brings me to the second biggest
mistake, which is not considering cost basis in the property. A husband and wife
married and bought a home 25 years ago for $25,000, and now the home is worth
$425,000. Let's say their kids are two years away from finishing high school and as
part of the divorce settlement the husband gets to keep the kids and gets full rights to
the house. His game plan is, two years after the kids graduate and head off for
college, to sell the house and buy a new home somewhere else. Now, assume that for
the next two years there's zero appreciation on the house and, assuming the couple never
made any major renovations or capital improvements, he's going to have to pay
capital-gains taxes on that $400,000 appreciation, minus the $250,000 exclusion that he's
allowed as an individual. But, had the couple sold the house before they divorced,
their combined $500,000 exclusion means they would have paid zero in taxes. The same
also applies for stock portfolio and other taxable investments that they would have
accumulated over the years together, so it's important to remember that cost basis -- not
just the current market value of the asset -- needs to be taken into consideration.

Q: You spoke about the husband always wanting the
retirement savings. What pitfalls are involved there?

Mr. Baradihi: Pensions and retirement plans like 401
(k) plans and Individual Retirement Accounts are usually considered marital assets and,
depending on the state you live in, a portion of your savings earned before your marriage
may be considered part of the marital asset as well. There may be a situation where
it might be desirable for a spouse to receive an equitable sum of cash upfront. For
example, if a husband is making $175,000 and the wife is a stay-at-home mom who will need
to go back to school or go back to work at a lower-paying job, gaining access to the
pension is not going to help her now. But being able to determine the value of the
pension now, we might suggest an arrangement where the husband is able to keep the pension
in return for cash or other assets or investments.

Another thing you need to consider when deciding whether to
include a retirement savings account in your demands is what's known as the tax-effecting
of assets. Basically, all that means is $100,000 in cash sitting in an IRA isn't the
same as a $100,000 cash in a savings account. If each account holds $100,000,
depending on the couples tax bracket, they might be paying 15% to 27% tax on that money
once it's distributed at age 59 1/2. And remember, the funds in the IRA cannot be
accessed before 59 1/2 without paying a 10% penalty for early withdrawal.

If there's a need to split retirement assets, you'll need a
qualified domestic relations order (QDRO) -- a written agreement that spells out to the
asset-management company who gets what money held in a pension or 401 (k) plan.
Without a QDRO, withdrawals from 401 (k) and pension plans -- even to split the
assets evenly between the divorcing husband and wife -- are subject to federal taxes and
early-withdrawal penalties. (For more details on how QDROs work, see this article.)

Q: So we've covered the house and the nest egg,
what about alimony and child support?

When it comes to child support and spousal support, or
alimony, no two cases are the same. That's when all the paperwork you've compiled
helps a CDP build a picture of what your financial need was during the marriage, and what
it will be after you're divorced. The number of people I see walk into my office
with literally no idea of what it costs to run their households is astonishing. For
example, can the spouse support herself with alimony plus investment income, or will it
also be necessary to get a job? Would the spouse be capable of paying sizable
support and also afford to pay his own living expenses? How long was the couple
married; when couples are married for longer than 10 years, it generally makes a stronger
case for more support for a lower-earning spouse.

If our side is looking for more alimony than a spouse is
willing to give, we will use our software to show that without that money our client is
going to run out of money within a specified period of time. Most times, a judge
appreciates having that data available when making a decision on the final settlement
should court action be necessary.

One final note I might add about alimony is one most often
overlooked: not protecting the spouse that is making the payments through life insurance
or disability insurance. Say you get divorced and your spouse is paying $3,000 to
$5,000 a month. If your spouse suddenly dies or become disabled -- and I'm telling
you it happens a lot more frequently than most people think -then you're both up a
creek. Depending on the couple's financial situation, it often makes more sense for
the spouse who's receiving the alimony or child support to hold the insurance policy in
his or her name, to ensure that premiums are being paid and that the policy is enforced in
the terms originally agreed upon.

Q: The highly publicized 1996 divorce of former
GE Capital CEO Gary Wendt and his wife, Lorna, raised awareness of the value of stock
options in a divorce decree. What are the pitfalls there?

Again, it all depends on where you live. There's
really no established way to split stock options. Whether and where stock options
fall into a divorce settlement really boils down to, 'Are they in the money?' or worth
more than the strike price of the option. If they are, then I find the best way to
handle them usually is to include that value in the settlement, or use it as a bargaining
chip to trade off if there are other investment or retirement assets that hold less
risk. (For more details on dealing with stock options in divorce, see this article.)

Q: You haven't touched on college-savings plans
here. What role do they usually play in divorce settlements?

College-savings plans such as Uniform Gifts to Minors and
Uniform Transfers to Minors usually aren't considered marital assets, but instead are
completed gifts to the minor. So those funds technically belong to the children and
are not split up in a divorce settlement. And depending on the state, providing
additional funds to pay for educating your children doesn't have to become part of the
divorce decree -- meaning in many states it's not necessarily either parents
responsibility to pay for a child's education.

Q: How likely is it that a financial plan agreed
upon by both parties won't get thrown out in court?

Its been my experience that financial settlements that have
been signed and agreed upon by both parties are rarely contested by the judge. In
fact, Judge Kathleen M. McCarthy, who serves in the Family Division of the Wayne County
Circuit Court in Michigan, does some of training here at the institute. She often
talks about certified divorce planners to couples before her in her courtroom, explaining
the value of bringing in experts who can flesh out the complete financial picture.
She counsels each spouse to get their own planner, to ensure that both parties' needs are
being adequately addressed. CDPs develop their own plans, then give it to the
client's attorney, who in turn will present the proposal to the spouse's attorney.
Obviously, there's a lot of back and forth between the two attorneys and, when all parties
are satisfied, the settlement is signed and presented to the court. By providing
hard numbers, equitably divided to meet each of the spouses' personal needs, you're able
to take some of the emotion out of the equation by documenting how the process can be
fair.